WASHINGTON – The Biden administration’s push to form an international buyers cartel to limit the price of Russian oil is meeting resistance amid private sector concerns that it cannot be reliably enforced, challenging the U.S.-led effort to drain the price of President Vladimir V. Putin war chest and stabilize global energy prices.
The top price was a top priority for Treasury Secretary Janet L. Yellen, who tried to avoid another spike in global oil costs at the end of the year. The Biden administration fears that the combination of an EU embargo on Russian oil imports and a ban on insurance and financing of Russian oil shipments will drive prices up by taking millions of barrels of that oil off the market.
But the untested concept has sparked skepticism from energy experts and, in particular, the marine insurance industry, which facilitates global oil shipments and is key to making the proposal work. Under the plan, it would be legal for them to grant oil cargo insurance only if it was being sold at a certain price or lower.
Insurers, who are mainly in the European Union and Britain, fear they will have to enforce the maximum price by checking whether Russia and oil buyers around the world are complying with the deal.
“We can ask to see proof of the price paid, but as an enforcement mechanism it’s not very effective,” said Mike Salthouse, director of global claims at The North of England P&I Association Limited, a leading global marine insurer. “If you have sophisticated state actors who want to deceive people, that’s very easy to do.”
He added: “We said it won’t work. We explained to everyone why “.
This has not deterred Ms Yellen and her key assistants, who have traveled the world to back their arguments with international counterparts, banks and insurers that an oil price cap can – and should – work in a time of rapid inflation and risk of recession.
“At a time of global anxiety over high prices, a cap for Russian oil is one of the most powerful tools we have to tackle inflation by preventing future spikes in energy costs,” Ms. Yellen said in July.
The Biden administration is trying to mitigate the fallout from the sanctions adopted by the European Union in June, which would ban Russian oil imports and the financing and insurance of Russian oil exports by the end of the year. Britain should have enacted a similar ban, but has not yet done so.
Ms. Yellen and other Treasury officials want these sanctions to include a spin-off that allows Russian oil to be sold, insured and shipped if it is bought at a price well below market rates. They argue that this would decrease the revenue that Russia has received by maintaining the flow of oil.
The plan relies heavily on the marine insurance industry, a network of insurers that provide coverage for ships and their cargo, liability for potential spills and reinsurance, a form of secondary insurance used to cover the risk of loss. Most of the major insurers are based within the Group of 7 Nations, which coordinated sanctions against Russia for its war in Ukraine.
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Lars Lange, secretary general of the International Marine Insurance Union, a German-based consortium, said he believes that even with a cap, insurers would still be reluctant to cover Russian oil exports for fear of violating sanctions.
“This insurance industry is more than ready to comply, but please set penalties in a way that we understand and can respect,” Lange said. “And with this oil cap, there are challenges, at least on our part.”
Mr. Lange said the cap would not work if only a few countries accepted it, because insurers from other countries would pick up the game and cover the load at market prices.
Treasury Department officials working on the plan met with the insurance and financial services sectors to try to dispel some of their concerns. They suggested that the industry would take no responsibility if sanctions were breached and that Russia and its oil customers should “attest” to the purchase price. Enforcing the limit, they said, would be similar to managing sanctions that have targeted oil exports from countries like Iran and Venezuela.
Officials also downplayed the idea that global participation is needed, arguing that countries like India and China, which have bought Russian oil at deep discounts, could benefit from a cap without signing the deal.
G7 leaders agreed in late June to explore the concept. The idea sparked mixed criticism after finance ministers from the Group of 20 Nations met in Indonesia in July. South Korea said it was willing to support it, while Indonesian Finance Minister Sri Mulyani Indrawati warned that a cap would not solve world oil supply problems. European officials, who have been skeptical, continue to say they are analyzing the feasibility.
The rush to carry out such a complex plan in just a few months comes as the United States struggles to finalize international deals like the Global Tax Pact, which Ms. Yellen brokered last year but is now stalled in Congress. In recent months, Ms. Yellen has sent her deputy, Wally Adeyemo, and Ben Harris, her assistant secretary for economic policy, to defend the limit for economic and national security reasons.
Adeyemo said in an interview that “a lot of progress has been made among the G7 finance and energy ministers, in terms of conversations about how we actually design it on a technical level.”
He added that “we have also made progress in terms of talking to other countries about joining our coalition to put together a price cap.”
Mr. Adeyemo said officials were working to design the limit so that insurers wouldn’t have to check every transaction to ensure compliance.
“We also had very constructive conversations with industry members involved in the maritime oil trade, helping both of us understand how that oil is being sold and who has information on the price,” he said. “But also how can we design a certification method that is as simple as possible to make sure we are able to enforce the price limit.”
Some former Treasury officials are skeptical that the plan will work.
“I think it’s a clever analytic idea, but there’s a reason why the phrase ‘too half-smart’ was invented,” said Lawrence H. Summers, Secretary of the Treasury during the Obama administration.
Noting that there are few examples of successful buyer cartels and that oil transactions can often be hidden, Mr. Summers said, “It may not be viable.”
The US hopes to have a deal by December 5, when the EU ban goes into effect, but many details remain unsolved, including the price at which Russian oil would be limited.
Treasury officials said the price would be set high enough for Russia to have an incentive to continue producing. Some commodity analysts have pointed to a range of $ 50 to $ 60 per barrel as a likely target, which is far below the current price of around $ 100 per barrel.
But a big wild card is how Russia might respond, including whether it reacts in ways that drive prices up.
Russian central bank governor Elvira Nabiullina said last month that she believed Russia would not supply oil to countries that have imposed a cap and predicted that this would lead to higher oil prices around the world. . Other Russian officials have suggested that the nation would not sell oil at prices below its production costs.
In a report last month, analysts at JP Morgan predicted that if Russia did not cooperate with a price cap, three million barrels of Russian oil per day could be removed from global markets, driving prices as low as $ 190. per barrel. Limiting production indefinitely would damage its wells, they said, but Russia could manage a temporary closure while supporting its finances.
Paul Sheldon, chief geopolitical advisor to S&P Global Commodity Insights, said a successful ceiling could be the best hope of stabilizing oil prices once the EU ban goes into effect. He said it was unlikely that Russia, which restricted natural gas flows to parts of Europe in retaliation for sanctions, would curb oil exports because of their importance to its economy.
“Our assumption is that Russia will not reduce production,” Sheldon said.
Brian O ‘Toole, a former advisor to the Treasury’s office for oversight of foreign assets, said even a brief shutdown of Russian oil exports could destabilize markets. But he added that Russia’s invasion of Ukraine showed that it was willing to take action contrary to its economic fortunes.
“This assumes that Putin is a rational economic actor,” said Mr. O’Toole, a senior non-resident member of the Atlantic Council working in the financial services sector of Russia’s cooperation with a price cap. “If that were the case, he wouldn’t have invaded Ukraine in the first place.”
But supporters believe that if the European Union bans insurance transactions, a cap on the price of oil could be the best opportunity to mitigate the economic fallout.
John E. Smith, former director of the overseas business control unit, said the key was to ensure that financial services firms and marine insurers were not responsible for overseeing every oil transaction, as well as providing guidance on compliance with regulations. sanctions.
“The question is whether enough jurisdictions will agree on the details to take the matter forward,” said Smith, who is now co-responsible for Morrison & Foerster’s national security practice. If they do, it could be a win for everyone but Russia. “
Matina Stevis-Gridneff contributed reports from Brussels.